Government publishes report on the tax and social insurance implications of intermediary employment structures and self-employment arrangements

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Government publishes report on the tax and social insurance implications of intermediary employment structures and self-employment arrangements

The Government today published a report on the implications for social insurance and tax receipts of intermediary employment structures and self-employment arrangements. The report was prepared for the Minister for Employment Affairs and Social Protection and the Minister for Finance. It is informed by a public consultation with a wide range of stakeholders.

The report finds that the available data does not indicate that self-employment is accounting for any significant increased share of the labour force, and accordingly the perception of the level of disguised employment may be overstated. It also notes that contract for service arrangements can provide flexibility, in many instances, for both businesses and workers, where they are freely chosen by both parties.

However, this flexibility can be abused to the detriment of workers and can distort the transparent and efficient operation of the labour market.

Minister for Employment Affairs and Social Protection, Regina Doherty, said: "The report addresses an issue of growing policy concern: the classification of workers for social insurance purposes in situations of 'disguised employment', such as intermediary employment structures, and certain self-employment arrangements.

Disguised employment can negatively impact on social protection rights, by limiting access to the full range of social insurance benefits, such as Jobseekers Benefit and Illness Benefit. It may also distort the functioning of the labour market."

The Minister also referred to the Actuarial Review of the Social Insurance Fund (SIF) as at 31st December, 2015, which was published on the 18th October 2017.

Minister Doherty said: "This report complements the work of the Actuarial Review. The findings of both these reports will play an important role in informing policy developments in relation to the Social Insurance Fund in the years ahead including expected demographic challenges. They provide government with a timely and evidence-led opportunity to review our social insurance system and to consult with stakeholders.

"It is important that we are in position to address future funding challenges and to provide social protection for workers in the new and emerging forms of work, while not stifling social innovation."

The Minister highlighted recent and forthcoming social protection reforms that increase the range of benefits for self-employed people and provide greater protection for vulnerable workers. In addition to the State and widow's/widower's pensions, since 2017 the self-employed also have access to maternity and paternity benefits, to the invalidity pension, and to treatment benefits. The proposed new protections for vulnerable workers include a prohibition on zero contracts and a minimum payment for low-paid workers who are called in to work but then sent home.

Minister Doherty said: "Many small and medium enterprises, and the jobs that they support, are created by self-employed entrepreneurs. The government wants to support enterprise and is committed to enhancing the position of the self-employed through improving the level of PRSI-based benefits available to self-employed people. In line with this commitment to supporting enterprise it is not intended to increase social insurance contribution rates for self-employed people at this time. However, the new remit of the Department in employment affairs provides an opportunity for greater synergy in protecting vulnerable workers and this report will inform our approach.

"In December, I published the Employment (Miscellaneous Provisions) Bill 2017 to tackle problems caused by the increased casualisation of work and to strengthen the regulation of precarious work. This will improve the security and predictability of working hours for employees on insecure contracts and those working variable hours with a particular focus on low-paid, more vulnerable workers."

Minister Doherty highlighted the need for greater awareness of the remit her Department has to determine the correct employment status and PRSI class of workers.

Minister Doherty said: "Where workers have concerns about their employment status, they should contact my Department's insurability section, known as Scope. This section advises workers on the class of social insurance appropriate to their employment status. Where required, it makes determinations on the correct social insurance class based on the nature of the relationship between the business and the worker, taking account of such factors as who decides the working hours and conditions of the worker. I encourage workers who feel that they are being deliberately and incorrectly misclassified as self-employed by their employer to contact our Scope section."

Minister for Finance, Pascal Donohoe, said: "I'm concerned that disguised employment practices make it harder to correctly classify workers for PRSI purposes. These practices can be used to reduce the amount of PRSI and tax being paid, with a subsequent loss to the Exchequer and the Social Insurance Fund. Even if the level of disguised employment may not be as great as people have thought, such losses, and the denial of employment rights, cannot be tolerated. I will give careful consideration to the contents of this report."

ENDS

Notes for editors

The report uses the term 'disguised employment' to define an employment relationship which creates an appearance that a person is self-employed when they are 'de facto' a direct employee of a business or are employed through a corporate structure. This definition includes intermediary employment structures and 'economically dependent workers', who, although nominally self-employed, are treated in the same manner as an employee.

The report was informed by a public consultation, based on a consultation paper which included possible options for addressing tax and PRSI losses. Twenty-four submissions were received in the public consultation. These came mainly from representative organisations and professional bodies, along with a number of individuals.

The report estimates potential losses based on various employment and earnings scenarios. The potential loss from various self-employment arrangements ranges from c €5,000 per annum at average industrial earnings, c €9,000 per annum at an earnings level of €60,000 and c €15,000 per annum at a salary of €100,000.

There are an estimated 15,000 people employed in personal service companies and managed service companies. The estimated gain to the Exchequer and Social Insurance Fund would be between €30 and €60 million per annum if a proportion of these workers (25 to 50 per cent) were employed under a contract of service and subject to PAYE.

The report sets out three proposals:

Consider reducing the differential in social insurance rates, so as to reduce the financial incentive to employers and employees to use self-employment arrangements and intermediary-type structures.

Consider undertaking an awareness campaign to promote the services of the Scope insurability section.

Explore further legislative options to treat nominally self-employed workers who are dependent on a single employer as class A contributors with the employer PRSI contribution paid by the company which actually uses their services and to assess any payment made to the worker as liable for income tax.

The report also contains an analysis of issues raised in the public consultation specifically pertaining to the construction sector. It looks at the administration of tax and social insurance in the sector, including 'relevant contracts tax' (RCT) and compliance activities. The report finds no evidence that the system facilitates the mis-characterisation of workers as self-employed as there are safeguards for workers who may have been incorrectly classified. For example, Revenue informs the sub-contractor after receiving the relevant contract from the principal contractor and will investigate if the sub-contractor is of the view that they are incorrectly classified. They can also engage with the Scope insurability section in the Department of Employment Affairs and Social Protection (DEASP) to ensure the correct social insurance classification is in place.

The report also sets out the various compliance activities of DEASP and Revenue in relation to the construction sector. In 2014, DEASP launched its compliance and anti-fraud initiative which contains actions to prevent, detect and deter social welfare fraud. The Department's special investigation unit comprises 91 officers and 19 Gardaí to investigate and report on social welfare fraud and non-compliance. Revenue conducts a full range of interventions to combat tax evasion in the construction section, including risk management interventions, Revenue audits and investigations and site visits. The Department and Revenue conducted over 2,000 joint inspections of construction sites in 2016.

Actuarial Review of the Social Insurance Fund

Under social welfare legislation, Actuarial Reviews of the Social Insurance Fund (SIF) are required to be undertaken at five-yearly intervals. The first such review was published in 2002, the second review was published in 2007 and the third in 2012. The aim of the review is to establish the medium and longer-term financial situation of the Fund. This Review sets out the positon of the SIF as at 31 December 2015 and presents projections covering the 55 year period from 2016 to 2071.

The 2015 Review was carried out independently by KPMG who were appointed following a competitive tendering process.

Social welfare payments in Ireland are made in three main categories: social insurance, which provides benefits based on an individual's social insurance contribution history; social assistance, providing means-tested payments and universal payments such as Child Benefit, which are not means-tested. The Actuarial Review relates to Social Insurance payments only. The review will inform both short to medium term and long term policy development in relation to the social insurance system generally and builds on the findings of the previous reviews in relation to Social Insurance benefits and pensions.

The main findings of the Actuarial Review of the Social Insurance Fund as at December 2015 are:

The Fund currently has a modest surplus of income over expenditure (2016 surplus of €0.4 billion on expenditure of €8.8 billion and receipts of €9.2 billion).

The surplus is projected to increase in 2017 before reducing in the period 2018 to 2019 and returning to a small shortfall in 2020. The annual shortfalls are projected to increase from 2021 onwards as the ageing of the population starts to impact.

In the absence of further action to tackle the shortfall, the excess of expenditure over income of the Fund will increase significantly over the medium to long term. The modest 2020 projected shortfall of €0.2 billion is expected to increase to €3.3 billion by 2030 and to €22.2 billion by 2071. In the period to 2045 the accumulated deficit in the fund is projected to reach over €100Bn increasing to over €400Bn by 2071 with an accumulated present value of about €335Bn.

Expressed as a percentage of GDP, the shortfall is projected to increase from 0.1% of GDP in 2020 to 0.9% in 2030, 3.1% in 2055 before gradually reducing to 2.9% of GDP by 2071.

In the longer term, sizeable Exchequer subvention will be required to meet ongoing expenditure requirements in the absence of reductions in expenditure levels or increases in PRSI income.

In the medium- to long-term, pension-related expenditure is projected to continue to be the predominant component of the Fund expenditure rising from 70% in 2016 to circa 80% in 2071. The population over State Pension Age (SPA) is projected to increase from 12% of the total population in 2015 to 17% in 2035 to 23% in 2055.

The pensioner support ratio is projected to decline from 4.9 workers for every individual over age 66 to 2.9 workers in 2035 and to 2.0 workers by 2055. This position is alleviated somewhat by the increase in the state pension age to 67 and 68 in 2021 and 2028 respectively.

Social insurance benefits offer excellent value for money for those on the lower part of the income distribution or shorter contribution histories, and the self-employed. For those at the higher end of the income distribution, the Fund is redistributive and they generally get back less than they pay in.

Employment (Miscellaneous Provisions) Bill 2017

Below is a summary of the main provisions in Bill:

The Bill provides that employers must give employees five core terms of employment within five days of commencement of employment. Employers who have not provided this statement after one month will be open to prosecution. This is a new offence. It will also be an offence for an employer to deliberately misrepresent the information required in the statement of five core terms.

The Bill prohibits zero hour contracts in most circumstances except in situations of genuine casual employment and where they are essential to allow employers to provide cover in emergency situations or to cover short-term absence. All employees, including people on 'if and when' contracts will benefit from the balance of measures proposed in the Government Bill.

The Bill provides for a new minimum payment for low-paid workers who may be called in to work but sent home again without the promised work or any meaningful compensation. It is expected that this provision will also act as a deterrent against the unscrupulous practice of employers calling into work ten people, for example, where there is only work for five people and the first five to show up get the work.

Banded Hours provision: The Bill introduces a new right for employees whose contract of employment does not reflect the reality of the hours they habitually work. This creates difficulties for employees in accessing credit, including mortgages. Under the Bill, such employees will be entitled to be placed in a band of hours that better reflects the hours they have worked over an 18 month reference period. The banded hours provisions will significantly improve the predictability and security of working hours for employees, so that they can better plan and get on with their lives outside of work.

The Bill provides strong anti-penalisation provisions for employees who invoke their rights under this legislation. This is a key element of the Bill particularly for workers in less secure employment who may be afraid to exercise their rights.